The Pursuit of Mediocrity--Why Investors Should Avoid Funds Sold by Insurance Companies

Face it: we live in an age of specialization.

There are restaurants for every international cuisine, experts who only focus on luxury travel, and summer camps which cater to any child's interests.

But when it comes to companies which offer mutual funds, some firms are specialists, while others offer them only as an accommodation, and this specifically includes insurance companies.

Here are three reasons why investors should not buy mutual funds offered by insurance companies:

1. - It's Not Their Main Business
By definition, the primary goal of insurance companies is to offer long-term life, medical, property, and business risk protection for a fee. Insurance is based on the Law of Large Numbers, actuarial tables, and low consistent rates of returns to pay the claims of the minority of policyholders, which are funded by a larger pool of people who are now currently making claims.

This is the way the business has run for centuries. A well-run insurance company is a cash machine which can effectively run on auto-pilot with a small trained staff. Ben Franklin owned an insurance company and it made him enough money to become an international statesman.

Insurance companies offer mutual funds as an accommodation to their 401(k) retirement business, but they are just that, an accommodation. Investing in the insurance world means avoiding risk (with the exception of AIG), and subsequently earning low returns which often had to just beat or match the actuarial hurdle for the insurance side of the business.

While that works in the insurance industry, it does not work in the interests of 401(k) and other fund shareholders who want to beat the indexes. A look at the insurance companies which offer mutual funds on the LemonList Web site will show how many of those insurance company funds have missed their benchmarks.

2. - The Insurance Company Patronage System
The other problem with insurance companies which sell mutual funds is that they are 100% load funds. Insurers need the high loads to fund their bloated corporate headquarters staffs, and national sales networks,which are essential to the insurance business. Insurance companies use this same model to rely on high-overhead mutual fund wholesalers to push their load funds which, too often, fail to beat their index benchmarks.

3. - No Innovation
Insurance companies are not known for innovations, especially in mutual funds. If anything, they offer new features on their core products, fixed and variable annuities, by adding new features to the "chassis," or core structures, of annuities. These features are so complicated and carry so many hidden fees and expenses that any annuity ad often consists of 75% disclosures.

Insurance companies are also top-heavy with management and under the thumb of the centralized home office. This creates a patronage, or a fraternity and sorority system of favored workers, who rise in the ranks regardless of qualifications.

In one case, the head of an insurance company's mutual fund marketing department openly boasted that he did not know anything about the mutual fund industry, even though he was appointed by the president of the mutual fund company to run the fund company's national marketing efforts.

That is an astounding admission from the marketing head of a national fund company, but he was so confident that he would never be fired that it was said in open conversation. Naturally, he is still there and still does not know anything about the mutual fund business. But as long as that patronage link is alive, he and many others have jobs. All this happens at the expense of unknowing shareholders.

4.- Go With the Specialists
Life is too short, and it will take too long for the average mutual fund investor to recoup their market losses from the current sever recession. When it comes to recovery times, every day counts, and if you can reduce your expenses by basis points (hundredths of a percent), you can recover your losses that much faster.

Further, it is not the responsibility of individual shareholders to compensate mutual fund wholesalers, pay for top-heavy executive patronage systems, and reward the managers who deliver mediocre fund performance.

That is what you are doing if you own a mutual fund owned by an insurance company.